Newcastle, where the leader of the city council says people do not feel optimistic, even if they are in work. Photograph: Christopher Thomond for the Guardian

David Cameron has been waiting for years to taunt Labour like this and now he does so at every turn. "Growth up! Employment up! Inflation down! The deficit down! The number of people out of work, down!" So runs his stock refrain in the House of Commons these days.

After the long haul of austerity, the economy is on the mend. The government says its tough medicine has cured the patient. Tories and Lib Dems feel vindicated and hope to be rewarded at the election by a grateful electorate. Since the coalition came to power in May 2010, the assumption has been that recovery would deliver a "feelgood" factor and boost the fortunes of the governing parties.

It is early days and there is still a year and a half until the next election. Yet the public is not reacting to all this good news as the politicians and pundits expected. There are few signs that voters believe the upturn is working for them and none, yet, that the coalition is more popular as a result.

The latest Ipsos MORI Political Monitor shows that half of Britons feel the recent economic upturn has had no impact on their standard of living (48%). Just one in seven (14%) says it has had a great deal/fair amount of impact. Even more relevant is that 77% do not expect economic growth to make much positive impression on their standard of living over the next year, while only one in five (19%) believe it will benefit thema fair amount or a great deal.

So what is going on? Labour argues that an underlying cause is that the link has been broken between economic growth and real wages. Most people's earnings have increased at well below the rate of inflation for most of the coalition's time in office, mirroring what has been happening in the US. Moreover, the kind of jobs that people are moving into are often low-paid, part-time and unstable.

Nick Forbes, leader of Newcastle city council, says people do not feel optimistic, even if they are in work. "Many workforces have accepted voluntary pay cuts or freezes, and we've seen an increase in the number of people working part-time in order to save colleagues' jobs," he says. "People aren't being repaid for these sacrifices. The cost of living is rising faster than wages, and the erosion of job security makes people fearful and cautious, which is holding back spending and growth."

What is different now, he says, "is the lack of hope in the future". "After the second world war, the country accepted austerity, but did so on the promise of a new welfare state.The economic crisis has deepened our country's inequalities, but there seems to be no big plan or vision for how we grow a new sustainable economy or rebuild a decent and fair society which has been shattered in recent years."

Tony Travers, a professor of government at the London School of Economics, says previous attitudes and assumptions about economics were shaken so profoundly by the financial crisis of 2008 that people are unsurprisingly more suspicious these days about notions such as growth. "It was so traumatic and so widely felt over such a long time that itwill inevitably affect the way people feel about the government and economy for years to come," he said.

Jacob Mohun, economist at the New Economics Foundation, arguesthat people are right to be suspicious about this upturn."The truth is that this recovery is based on rising house and equity prices as money is being pumped into housing and equity markets through quantitative easing and George Osborne's Help to Buy scheme. This is making shareholders and homeowners feel richer and spend more as the prices of their assets rise. However, any initial recovery will be felt only by those who already own such assets or those who can afford a mortgage. Only if this spending has a wider effect on investment can a recovery be maintained."

It used to be the case that the Conservatives felt happy putting faith in the "trickledown" theory of economics – the idea that, if business creates wealth, everyone will benefit. The market would work for all. Now post-crash, and as wages lag behind inflation and do not rise with growth, they can't do that so easily. Suddenly they look bereft when trying to answer what the economic recovery means for ordinary people.

Last week the former Tory prime minister John Major caused his party another headache when he said he was shocked by the lack of social mobility in this country, one in which the privately educated seemed to entrench themselves ever more securely in dominant positions in society. Our Opinium poll today shows 51% of people think their children will be worse off than they are, and only 26% think they will be better off. The idea that progress is somehow ingrained in a market driven system has disappeared. It is not just that the link between growth and wages has been broken but also the link between growth and people's perceptions of their own chances of self-improvement.

Cameron now finds himself attacking Miliband for promising to intervene in markets, while having to look at ways of intervening himself to get into the cost of living argument. The Tory MP for Harlow, Rob Halfon, who has campaigned on cost-of-living issues for years, believes it is only a matter of time before people will feel the recovery for themselves. He recently convened a jobs fair in Harlow, Essex, at which businesses looked for recruits among the unemployed. "It was incredible how successful it was. You could really feel that things are getting better," he said. But the government needed to match Miliband on the cost of living, he said. It had to find ways to keep utility bills down.

Three and a half years ago, in the summer of 2010, Cameron and chancellor George Osborne gambled that a return to vigorous growth in the latter half of this parliament would justify the pain of cuts and carry them to victory. Miliband and his shadow chancellor, Ed Balls, feared they might be right. But as public faith in the capacity of the market to deliver prosperity diminishes, it no longer seems like a sure bet.